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What is Big Money?

Wholesale money refers to large sums of money lent by financial institutions in money markets. This wholesale banking encompasses the market for negotiable securities, such as treasury bills, commercial paper, bankers’ acceptances, foreign or negotiated deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds and short-term and asset-backed mortgages. securities.

Key points to remember

  • Wholesale money refers to large sums of money lent by financial institutions in money markets.
  • As the subprime crisis showed, it is quick to organize but dangerous to rely on it.
  • Wholesale money markets are a good leading indicator of stress in the financial system.

Understanding Big Money

Wholesale money is a way for large corporations and financial institutions to obtain working capital and other types of short-term financing – and it’s essential to the proper functioning of the US and global financial systems.

Wholesale funding can be quick to set up but dangerous to rely on, as banks discovered during the global financial crisis when the wholesale funding market collapsed. Excessive use of short-term wholesale funding – instead of retail deposits – and repurchase agreements exposed banks to liquidity risk at a time when liquidity mattered most.

An example of this occurred after the collapse of Lehman Brothers during the 2008 financial crisis. A bank run ensued and investors withdrew their wholesale funds. Wachovia reportedly lost about 1% (or about $5 billion) of its funds. The bank was instructed by the FDIC to negotiate with Citigroup and Wells Fargo for a takeover instead of filing for bankruptcy. In one weekend, it was sold to Wells Fargo for around $15 billion.

A watershed moment in the subprime mortgage crisis came in 2007, when Northern Rock, a UK bank that had relied on wholesale markets for most of its funding, was no longer able to fund its operations. loan and had to apply to the Bank of England for emergency funding. .

Wholesale Money Market Indications

Wholesale money markets are therefore a good leading indicator of stress in the financial system and provide a more accurate picture of the cost of borrowing than official central bank interest rates. Today, the OIS overnight discount rate has become a key measure of credit risk in the banking industry, using short-term benchmark rates such as the federal funds rate.

Demand for high-quality liquid assets (HQLA) in global financial markets suggests wholesale money markets are far from fixed, even as global systemically important banks (G-SIBs) comply with new measures of Basel III in terms of capital and liquidity, such as the liquidity coverage ratio and the net stable funding ratio.

In the United States, new money market regulations came into effect in 2016, but the Federal Reserve will have to ensure the stability of the loan markets via its reverse repurchase facility (RRP) for some time. Indeed, rising interest rates increase banks’ reliance on wholesale funding by reducing retail deposits. This, in turn, increases systemic risk.

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